Key points of investment:

The company released its 2024 semi-annual report: In the first half of 2024, the company achieved operating income of 3.088 billion yuan, a year-on-year decrease of 10.07%, net profit of 38 million yuan, a year-on-year decrease of 77.81%, after deducting net profit of 13.44 million yuan, a year-on-year decrease of 91.02%. Among them, 2024Q2 achieved operating income of 1.953 billion yuan, a year-on-year decrease of 15.96%, net profit of 0.128 billion yuan, a year-on-year decrease of 23.69%, and net profit of 0.119 billion yuan after deduction, a year-on-year decrease of 27.85%.

The proportion of smart toilets continues to rise, and product development innovation continues to advance. In the first half of 2024, the company's sanitary ceramics revenue was 1.57 billion yuan, down 6.08% year on year, including smart toilet revenue of 0.63 billion yuan, down 7.66% year on year, accounting for 0.54 pct of the company's revenue; faucet hardware revenue was 0.833 billion yuan, down 12.13% year on year; bathroom furniture revenue was 0.334 billion yuan, down 0.17% year on year; bathtub bathroom revenue was 0.151 billion yuan, down 14.15% year on year; Ceramic tile revenue was 0.132 billion yuan, down 37.44% year over year. In the first half of 2024, the company invested 0.17 billion yuan in R&D, accounting for 5.48% of the company's revenue, providing a solid guarantee for the company to maintain an innovation-driven and product-leading strategy.

Through continuous innovation, we master dozens of core technologies with independent intellectual property rights, and quickly transform new products to meet market needs.

Adhering to retail as the main focus, promoting omni-channel marketing, overseas business has performed well. In the first half of 2024, the company's distribution model revenue (including distribution and retail, e-commerce, home improvement and engineering) was 2.68 billion yuan, down 9.69% year on year, accounting for 86.77% of the company's revenue; revenue from the direct sales model (mainly direct e-commerce and direct engineering) was 0.38 billion yuan, down 15.88% year on year, accounting for 12.24% of the company's revenue. The company continues to accelerate channel decline, improve the network structure, and expand sales coverage. By the end of June 2024, the company had a total of 1,621 distribution terminal stores (mainly home improvement stores, community stores and township stores). While the domestic market is being deeply cultivated, the company continues to advance its internationalization strategy and comprehensively accelerate overseas market expansion. In the first half of 2024, the company's overseas revenue was 0.162 billion yuan, an increase of 178.25% over the previous year, accounting for 5.26% of the company's revenue.

The gross margin improved relatively month-on-month, and the expense ratio declined month-on-month. 2024Q2's net profit margin to mother was 6.55%, -0.67pct year on year; gross profit margin was 28.56%, down 0.4 pct year on year, up 4.16 pct month on month. On the cost side, the 2024Q2 company's sales expense ratio, management expense ratio, R&D expense ratio, and financial expense ratio reached 7.85%, 8.39%, 4.78%, and 0.48%, respectively, -0.11pct, +1.93pct, +1.27pct, +0.55pct, +0.55pct, +0.69pct, -7.71pct, -1.90pct, and -0.44pct, respectively.

Profit forecast and rating: We expect the company's net profit for 2024-2026 to be 0.339, 0.355, and 0.356 billion yuan, respectively, and -20.2%, +4.8%, and +0.3%, respectively. The current closing price corresponds to 2024-2025 PE 19.06 and 18.18 times. As a leading enterprise in ceramics and sanitary products, refer to comparable companies to give the company a PE valuation of 20 to 21 times in 2024, corresponding to a reasonable value range of 7.00 to 7.35 yuan, corresponding to 2024 The PS valuation is 0.88 to 0.93 times, giving it an “superior to the market” rating.

Risk warning: Downstream demand falls short of expectations, smart toilet penetration falls short of expectations, and the product structure upgrade process falls short of expectations.